Understanding risk of bubbles in cryptocurrencies

Abstract

As cryptocurrencies emerged only recently, they are subject to only very limited financial regulations. In this paper we study which variables can predict bubbles in the prices of eight major cryptocurrencies, focusing on uncertainty measures as predictors. We detect multiple bubble periods for all eight cryptocurrencies, particularly in 2017 and early 2018. We find that higher volatility, trading volume and transactions are positively associated with the presence of bubbles across cryptocurrencies. Regarding the uncertainty variables, the VIX-index consistently demonstrates negative relationships with bubble occurrence, while the EPU-index mostly exhibits positive associations with bubbles. These results may assist authorities in designing appropriate regulations.